Energy Markets

PJM's Zibelman discusses how regulatory issues will play into Congress' agenda

OnPoint

Aired: Tuesday, January 9, 2007

With utility bills soaring for many customers throughout the country, questions are being raised as to why rates have increased and what Congress can do to help out. During today's episode of OnPoint, Audrey Zibelman, executive vice president and chief operating officer of PJM Interconnection, explains the benefits of wholesale electric power markets. Zibelman also calls for Congress to hold hearings on building new infrastructure and promoting renewables.

Mary O'Driscoll: Electric power markets have been a hot topic of conversation lately, particularly when the consumers in many states are facing some steep electricity rate hikes coming up this year. PJM recently issued a new report talking about current rates in your region and in New York, comparing it to what rates would have been absent the organized markets that you both have. And you found savings of between $430 million and $1.3 billion. How can you explain those benefits when people in Maryland, for instance, are going to be seeing 72 percent rate hikes? Some people in Pennsylvania are going to be seeing 61 percent rate hikes. How do those savings compute in there?

Audrey Zibelman: Well, I think there are two issues that we need to address. One is, is that our electric rates increased today, as compared to where they were, say 10 or 15 years ago. And clearly, rates are going to go up and that's because so much of electricity pricing is driven by fuel costs, such as gas and coal and nuclear. And all of our internal fuel costs have also increased. And so, necessarily, the price to the consumer is going to go up. Just like the price of gas at the pump is going to go up, such as the cost of any product that you're purchasing over a period of time, prices will increase. In this case, with electricity, it is largely driven by the fuel prices as well as transportation. The question, however, that we were addressing is whether or not having wholesale competition as opposed to retail competition and broad regional markets have improved the efficiency of existing generation and have allowed us to moderate the price increases that would have occurred otherwise if we did not restructure. And what we have found is that just as we had hoped when we had decided to create organized markets for electricity at the wholesale, is that we're going to get better use of our generation. We're going to get more efficiency out of the existing generation as well as new generation because generators would be competing against each other. And that we would get better use of the existing transmission system because we'd be able to optimize its usage for the benefits of consumers. The reason we did the study we did is we wanted to compare wholesale consumers, those are public power entities who always buy on the wholesale market, with other public power entities outside of organized markets that have similar fuel mixes. We did that because restructuring and price caps and other things that might happen at the retail level make it very difficult to see the benefits of wholesale competition. This gave us the purest view and really validated what a lot of other studies have said, is that the fundamentals of the wholesale marketplace have proved to benefit consumers.

Mary O'Driscoll: Well, you're seeing groups such as the American Public Power Association, which represents municipal electric utilities, they charged that the regional transmission systems such as PJM and others around the country are causing their wholesale power costs to go up. The group specifically notes that there were seven members of the power agency in Virginia that signed new power contracts after PJM took over there and prices went up 100 percent in two years. So how do you respond to that?

Audrey Zibelman: Again, I think we have to be careful about in terms of prices increasing as a result in changes in fuel mix and whether or not people were using older contracts that had been terminated and signing new contracts under the new construct, where, in fact, fuel prices and other internal costs have increased. At the same time we also know that Dominion Electric, for example, who joined PJM just recently, in their first fuel clause filing, after they joined PJM, noted $115 million reduction in their fuel prices as a result of being able to purchase on the wholesale market. So the issue is this, I think, going forward, we're at a time in our industry where we need to build new transmission, new generation. We need to maximize the availability of the markets for innovators such as renewable energy providers such as wind providers and demand response. What we've been able to demonstrate, time after time in our own experience, is that by having organized markets and open and transparent pricing and the ability of many participants to be able to play on an even playing field we're allowed to get that innovation. And moving forward that's where we think we need to go. We need to find ways to make sure that when new generation gets built it's the right generation at the right time and the right price. And what we have found is that by having organized markets and open and transparent pricing we get those advantages. We also know that for renewables the ability to have an independent entity such as a regional transmission operator operate the grid and, again, large organized markets, it helps folks that want to invest in wind power to be able to basically get to the market that much easier. That's what we need to focus on.

Mary O'Driscoll: OK, but, I mean when you're looking at these municipal companies here, these municipal utilities that are saying our costs just went up 100 percent over two years, you're attributing that to ... what? To an increase in fuel prices? I mean can that happen?

Audrey Zibelman: Well, you would have to know the specifics of the particular deal. If they're talking about an existing contract that's terminated and they're entering into new contracts the new contracts are going to reflect the prices currently versus existing prices. And I think that we are well aware of concerns of municipals, as well as co-ops and all of our customers, of the need to make sure that electricity is produced at the most efficient price. And the best way to do that is to have broad regional planning so you have transmission and generation, as well as demand response. It's getting built based on the best available information. That you have price transparency so people understand the value of energy and you have the rules in place so that folks have the confidence to invest and, thereby, make certain that their investments don't become stranded. And that's what we're focusing on as we develop the markets.

Mary O'Driscoll: OK. When the new Democratic Congress comes in a little later this month there are some calls for lawmakers to conduct oversight hearings into what's going on, into the wholesale power market competition. And even the chairman of the two congressional committees, John Dingell in the House and Jeff Bingaman in the Senate, have expressed some interest in having hearings on these issues. What do you think of that?

Audrey Zibelman: Well, I think it would be very good for us to have hearings on issues and I hope Congress does, and I hope they have it on the issues that I think are most important. And we have some very important issues that we need to address in this country. For example, we all know we need to get new infrastructure built, but we all know the difficulty, citing, for example, new transmission or even advance coal generation or nuclear because of local concerns about the impacts on the local community. We need to understand how to address that issue. We know that we want energy independence. We also know that we want to promote renewables to the maximum extent we can and we want to promote demand response to the maximum extent we can. I think it would be very helpful to have hearings to understand how we can work together those of us, for example PJM is very interested in creating the maximum amount of public good for all within its region, is what do we need to do to get these things done? And focus on those issues, because those I think are going to be the most important issues setting forth in this new Congress, is how do we move this forward? And how to we get things built? And how do we get the investments made in the types of infrastructure we want, new technology, demand response, renewables, new generation and even new transmission when we need it.

Mary O'Driscoll: You mentioned demand response, which is, it's an interesting idea and something that PJM is working on. You've got a demand response program right now. You said that your customers saved how much?

Audrey Zibelman: Over the peak week in August they saved $650 million in terms of reduction in costs that we were able to calculate. Others have said it's more. And we paid demand responders $5 million to do that. So essentially the way the equation works, we paid $5 million for various customers to reduce their load during the time that the price of power was at its highest. And as a result of their volunteering to do that we were able to save, overall in the market, 650 million, which is a pretty decent return on that investment.

Mary O'Driscoll: OK. Another criticism that has come to the organized markets from ELCON, the Electric Consumers Resource Council, and one of their criticisms is that they say the RTOs generally, the regional transmission organizations such as yours, generally say that you're operating markets. But in reality, with price caps, with mitigation measures, you're really doing administrative determination of costs, which essentially is regulation. And the argument being that you can't have competition if there are going to be all these price spikes and so something has to be done to do that. But if you can't have competition with price spikes then why go through this essentially what ELCON calls another way of regulating markets?

Audrey Zibelman: Well, I've heard that argument said before, but actually when you take a look at the hours that PJM actually mitigates over the course of a year it's very small hours. What we do have is a market monitor and we have rules in place to avoid people exercising market power. But what we had thought is the markets are operating very well. Now there are issues all the time in terms of, well, people don't like the fact that there's too much mitigation. If in fact theirs are uncontrolled markets and there are not price caps put on when in fact it looks like market power can be exercised there is also a complaint there. And I think it's very, very important to remember that the markets are 10 years in the making and we're evolving and we're improving every year over year as we address concerns and problems. And that's the benefit of having an independent market administrator because our role, our job is to make sure that the markets operate efficiently and fairly and that there's someone who's not tied in to any of the assets watching the markets. That's really what the RT Os do and it's worked out very well.

Mary O'Driscoll: OK. Well, we're going to have to end it on that note. I'd like to thank Audrey Zibelman of PJM Interconnection. This is OnPoint. I'm Mary O'Driscoll.